The measure would allow some students to borrow at the same rate that banks get. | AP Photo

Sen.
Elizabeth Warren introduced her first standalone piece of legislation
Wednesday, calling for the government to give student borrowers the same
deal it gives big banks when they need a loan.

The measure would allow students who are eligible for federally
subsidized Stafford loans to borrow at the same rate that banks get from
the Federal Reserve when they need a short-term infusion of cash from
the central bank’s discount window.

“If the Federal Reserve can float trillions of dollars to large
financial institutions at low interest rates to grow the economy, surely
they can float the Department of Education the money to fund our
students, keep us competitive, and grow our middle class,” Warren
(D-Mass.) said on the floor of the Senate Wednesday.

Warren is a leading critic of Wall Street banks and the freshman
senator’s floor speech Wednesday showed she is looking to highlight
government support for the banking industry to make the case for her
other policy priorities.

The proposal drew some blowback from the banking industry.

Patrick Sims, a director in policy research at Hamilton Place
Strategies, argued a short-term loan from the discount window during a
time of crisis is not at all comparable to a long-term student loan.

While some people have called for higher rates or penalty rates for
banks that access the discount window, the point of the funding is to
prevent a liquidity crisis and is not how banks fund themselves over
time, Sims said.

“Using something completely unrelated and feeding into populist
animosity toward large banks to increase the sympathy for the student
loan body or students in general, it just kind of sounds like a weird
way to legislate,” Sims said. “I don’t know if it necessarily helps our
student loan situation in the United States today.”

Under Warren’s proposal,
the Fed would make funds available to the Education Department for one
year to make loans to students at the same rate offered to large banks.

The bill would give students relief from high interest rates while
giving Congress time to find a long-term solution to the increasing
costs of Stafford loans, Warren said.

She noted that large banks can currently borrow from the Fed’s
discount window at a rate of about 0.75 percent, but if the rate for new
Stafford loans increases — as it is set to do on July 1 — a student
borrower seeking a loan this summer will pay almost 7 percent.

“In other words, the federal government is going to charge students
interest rates that are nine times higher than the rates for the biggest
banks — the same banks that destroyed millions of jobs and nearly broke
this economy,” she said. “That isn’t right.”

This is only the second time Warren has delivered a Senate floor
speech. The first was just a few weeks ago, when she spoke about the
bombings at the Boston Marathon.

The CFPB, Warren’s brainchild, is scheduled to hold a field hearing on student loans later today.

The bureau said last year that student loan debt had topped $1
trillion, and it has warned about the ripple effects on the economy if
those borrowers are unable to buy a home or save for retirement.

Warren also noted the “serious risk to the recovery” that student
debt poses, and said students are just as important to economic growth
as big banks.

Warren dismissed the idea that the bill would be too expensive. The
federal government earns 36 cents in profit on every dollar it lends to
students, she said, which will bring in a total of $34 billion next
year.

“We shouldn’t be profiting from our students who are drowning in debt while we’re giving great deals to big banks,” she said.

This article first appeared on POLITICO Pro at 3:03 p.m. on May 8, 2013.

CFPB Pushes Student Debt Relief

Posted: 05/08/2013 8:23 pm EDT | Updated: 05/08/2013 9:02 pm EDT

Households struggling under the weight of student debt
burdens moved one step closer to a lifeline Wednesday, after the federal
consumer regulator suggested that Washington policymakers consider
government-initiated loan workout and refinancing schemes for distressed
borrowers.

The policy options, culled from more than 28,000 comments
on a Consumer Financial Protection Bureau consultation regarding
student loan affordability, may guide the Obama administration's
approach to reducing student debt burdens, which have outpaced inflation
and earnings growth and are untethered to broader borrowing rates.

“We are concerned that unmanageable student loan debt may be harmful
to recovering consumer markets and may be dragging down borrowers’
lives,” said Richard Cordray, CFPB director, who likened the current
student loan market to the subprime market for home loans that led to
the financial crisis. “We learned a hard lesson in the wake of the
mortgage meltdown. We cannot just sit by and watch this happen to people
again."

The report comes on the heels of an increasing number of warnings from policymakers, ranging from the Treasury Department to the Federal Reserve Bank of New York,
concerned that high student debt burdens are dampening consumption and
borrowing and may pose a risk to financial stability or economic growth.
Of consumer debt, only home mortgages exceed the $1.1 trillion in
outstanding student loans, according to CFPB and Federal Reserve data.

The CFPB report, too, warned that high student debt levels are
preventing a generation of borrowers from saving enough for retirement,
starting businesses or buying a home.

“There needs to be a significant attention if you believe that
there's a broader impact on the economy and society of borrowers who are
dealing with this debt today,” said Rohit Chopra, CFPB student loan
ombudsman, describing what he called the “student debt domino effect on
the broader economy."

The potential programs outlined in the CFPB report could help
borrowers like Katie McKenna of Seattle. A 32-year-old nutritionist,
McKenna has $138,000 in outstanding student loans, with most of that
debt carrying an interest rate exceeding 8 percent.

"Preparing for retirement is not really on my mind. It's hard to
conceptually put money away when I have so much debt," McKenna said.
"I'm not doing savings, I'm not doing retirement; I'm curious about
buying a house, but I'm not sure if that's a good idea.”

“Personally I don't plan to have children," she added, "but my dad
told me the other day, jokingly, 'You can't have kids, you have too much
debt.'"

Lawmakers are weighing legislation that could help borrowers reduce
their debt burdens, either through bankruptcy, government-sponsored
modifications or refinancing schemes. On Wednesday, Sen. Elizabeth
Warren (D-Mass.) proposed legislation that would set interest rates on some student loans to the same rates enjoyed by banks
that borrow from the Fed. Her bill would reduce rates from their
current 3.4 percent to 0.75 percent for loans that would be funded by
the Fed.

The CFPB report pointed to past government programs that benefited
lenders, suggesting it may be time for an initiative that focuses
instead on helping student borrowers. For example, a 2008 law called the
Ensuring Continued Access to Student Loans Act (Ecasla) led to “some
cases of extraordinary gains” when companies that owned student loans
later sold them to the Department of Education.

Sallie Mae, the largest student lender and loan servicer, recorded
gains of $284 million in the 2009 fiscal year and $321 million in the
2010 fiscal year off such sales, the CFPB said, citing Sallie Mae
securities filings.

The company defended its actions in a statement, saying, “Given the
dire circumstances the markets were facing at the time, this
intervention afforded 6 million students to access higher education at
an extremely low cost to the Department of Education."

The CFPB report also highlighted past government interventions in the
student debt marketplace, such as programs by the Education Department
and the Fed, as a basis for future action, and detailed a potential
loan-modification scheme similar to an existing home-loan initiative run
by the Treasury Department.

In addition, the consumer agency suggested a refinancing program that
would rely on the Federal Financing Bank, a government corporation that
borrows from the Treasury and lends to agencies and borrowers with
government guarantees. Rural utility concerns are among the bank’s
biggest beneficiaries, federal data show.

Cordray said a refinancing scheme “would make sense” because students
who applied for loans were much riskier borrowers then compared to when
they graduate and secure employment. “Given today’s historically low
interest rates, there is a tremendous opportunity for lenders to take
advantage of an underserved market,” he said.

Cordray also supported a loan modification program for borrowers with
private student loans that tied monthly payments to “reasonable”
debt-to-income ratios.

Lol CC, Im gonna set up a payment plan based on my income, plus my parents help...but after I complete med school I will most def have six figures worth of debt...my mom is trying to convince my dad to use some of his pension to pay off my debt...he dont hear her though...all I can do is laugh cause its so damn sad...we are all doomed...

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